Apple's App Store: $1 Billion-Plus By Next Year?

Could Apple's App Store--a hub for third-party applications on the iPhone--be a $1 billion-plus market next year? If you look beyond the hoopla of the World Wide Developers Conference, says one analyst, it's a safe bet to make.

"The Street is generally more focused on the iPhone hardware and pricing than software (including third-party apps)," wrote Piper Jaffray analyst Gene Munster in a research note. "We believe the App Store could be a $1 billion-plus market (aggressive case), and add 1 percent to 3 percent to operating income in calendar year 2009."

Munster said his estimates were based, in part, on his assumption that there will be an active App Store user base of 78 million, including iPod touch portable media player owners and iPhone owners by the end of calendar year 2009. With this scenario, he said he assumes that there will be 91 percent active usership for the App Store.

"While this may seem aggressive, Apple announced that of its current iPhone users, 98 percent browse the Web and 94 percent use e-mail," he said. "We estimate average total revenue per user of $10 by calendar year 2009; in other words, on average, App Store users will buy two apps (one free and one for $10, or any permutation thereof). Although this is our neutral case, we believe our assumption of $10 per user by the end of calendar year 2009 is actually quite conservative."

Munster also predicts that new software will drive hardware sales. He believes that Apple's mobile platform is unique because it controls both software and hardware.

"Even though this software will be available for current-gen iPhones, we believe that 3G data along with the many new features the App Store will enable should help to drive sales of the updated hardware," according to Munster.

The analyst also pointed out that beginning in June, developers will be able to sell their applications in two ways: through a new App Store directly on the iPhone, or through a new section of the iTunes Store. Munster said that the developer picks the price of the application and receives 70 percent of that price, while Apple receives the remaining 30 percent to operate the App Store. He also said Apple indicated that the App Store will be run "near-break-even", similar to the iTunes Store, in order to cover credit-card transaction and hosting fees.

"Applications can be given away free of charge, and in this scenario, neither Apple nor the developer will bring in any revenue from the application," he said. "Apple is effectively offering free hosting for all free iPhone apps on the App Store. Users will download apps directly to the device or sideload them (through a USB connection) from a computer using iTunes. The credit card linked to the iTunes account will be used to pay for the application."

Munster conducted a small survey of 20 developers and found that 50 percent of them were developing enterprise apps (15 percent location based-services; 10 percent for entertainment; 10 percent for video games; 15 percent for other). He believes the figures are a positive indication of the potential for enterprise adoption of the iPhone.

"While 70 percent of the respondents develop applications for other mobile platforms, 70 percent of the apps we discussed will not be available on other platforms," Munster said. "Developers cited the iPhone's unique feature set, which results in unique apps that cannot be easily ported to other mobile platforms. Ultimately, we believe this creates added value for the iPhone over and above other mobile platforms."